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EDITIONS
 Friday, 20 December, 2002, 22:16 GMT
Banks pay $1.4bn to settle stock tip row
New York transit
Wall Street workers face new work practices
Wall Street banks and brokerages are to pay more than $1.4bn (875m) to settle a row with US regulators over stock tipping.

The firms had been accused of giving investors unreasonably favourable reports on companies with which they hoped to win investment banking business.

New York attorney general Eliot Spitzer
The agreement will permanently change the way Wall Street operates

New York attorney general Eliot Spitzer
The 10 institutions, which include most of the giants of the financial industry, have agreed to pay $900m in relief for investors, $450m to fund independent research and $85m towards investor education.

The settlement also calls for the banks to break the links between their research and investment banking units.

Protecting the small investor

"The agreement will permanently change the way Wall Street operates," said New York attorney general Eliot Spitzer in the settlement statement.

"Our objective throughout the investigation and negotiations has been to protect the small investor and restore integrity to the market place."

Announcing the settlement at a press conference, Mr Spitzer said retail investors knew there were no guaranteed returns in the market.

"But the one thing they deserve is honest advice and fair dealing," he said.

"That is what this deal is designed to produce."

Payments

Hardest hit under the settlement is Citigroup, whose Salomon Smith Barney arm has had to pay $400m in a combination of penalties and payments towards independent research and investor education.

WHAT THEY WILL PAY
Salomon Smith Barney (Citigroup) - $400m
Credit Suisse First Boston - $200m
Merrill Lynch - $200m
Morgan Stanley - $125m
Goldman Sachs - $110m
Deutsche Bank - $80m
UBS Warburg - $80m
Bear Stearns - $80m
J P Morgan Chase - $80m
Lehman Brothers - $80m
"We are pleased that today's announcement of a settlement-in-principle will put these regulatory matters behind us," Citigroup said in a statement.

"We share with our regulators the goal of restoring investor confidence. We have faced the difficult issues of the past several months head-on, and we have implemented new practices and standards that are leading the industry," Citigroup added.

Credit Suisse First Boston and Merrill Lynch will both have to pay a total of $200m, although the Merrill Lynch total includes the $100m it paid earlier this year to settle charges that its analysts had misled investors.

Stopping the spin

During the bull market of the 1990s, it is alleged, banks used their research analysts to drum up business.

Banks would publish overly optimistic research on companies in order to win more business for their investment banking arms.

Regulators have also alleged that some banks pushed shares in new flotations - where the share price was expected to rise immediately - to senior executives, a process known as "spinning".

In order to counter these practices the terms of the settlement include:

  • A complete ban on the "spinning" of new flotations or initial public offerings (IPOs).

  • Firms will have to "severe the links" between research and investment banking. Analysts will be barred from being paid for research by the investment banking arms and will not be able to go on "pitches and road shows" to attract business.

  • Firms will have to provide retail investors with independent investment advice. For a five-year period each of the ten firms will have to "contract with no less than three independent research firms that will provide research to the brokerage firm's customers". An independent monitor for each firm will be chosen by regulators.

  • Each firm will have to publish its ratings and price target forecasts so analysts' performance can be compared.

  WATCH/LISTEN
  ON THIS STORY
  The BBC's Kate Noble
"They hope this is the dawn of a new day on Wall Street"
  New York attorney general Eliot Spitzer
"What used to be a conflict of interests is still a conflict of interests"
  Josh Chafin, Financial Times
"There is a lot of talk about putting an end to a tough year"

Politics of regulation

Worldcom goes bust

Enron fall-out

Andersen laid low

FORUM
See also:

20 Dec 02 | Business
31 Jul 02 | Business
07 Jun 02 | Business
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